Two Investing Lessons Learned from History

Stock Market Video

What a Famous Defeat Can Teach You About Stock Investing

This week’s Fortune Cookie

In Case You Missed It

Given the way the market has been acting recently, there aren’t many great stock market victories to write about, so I’m not in a celebrating mood. I still have some profits in the holdings of Cabot China & Emerging Markets Report, but it’s been weeks since I felt like doing Rocky’s Gonna Fly Now dance at the top of the museum steps.

My mother used to say, “If you can’t enjoy an experience, you might as well learn something from it.” So I’m trying to do just that.

The market is always trying to teach us something and the more important the lesson, the more the market charges for it. You can laugh it off when the market just bruises you. But its longest-lasting lessons leave scars.

Today, putting on my military historian hat, I have a lesson from more than 70 years ago that still applies today.

The Maginot Line Lesson

After WWI, the French, who had suffered enormous casualties in the early days of that war, constructed a heavily fortified line of defenses all along the French-German border. The Maginot Line, named after the French Minister of War who advocated it, was a series of bunkers, gun emplacements and firing points linked by underground railways. It was also air-conditioned.

The hope was that the line would repel any future German invasion, or at least delay it enough to give the French army time to mobilize and organize.

What actually happened is the stuff of military legend. When WWII began, the Germans attacked through Belgium, storming through the supposedly impenetrable Ardennes Forest and bypassing the line completely.

France fell in six weeks.

There are actually two lessons taught by the failure of the Maginot Line. The first is not to assume that the next war will be fought just like the last one. Translated into stock market language, the lesson is not to take previous market patterns as gospel. (In particular, I’m thinking about the over-generalization of “selling in May and going away” because you’ve heard the saying.) The market is better at coming up with new ways to take your money than you are at making plans based solely on history.

The second lesson is not to rely on a static defense. If your market strategy has only one tactic to use, the market will have little difficulty in finding your weak spot. In particular, I’m thinking that buy-and-hold and index strategies that are the equivalent of just sitting there and waiting while the market does its worst. The more flexibility you have in putting your money to work, the more you can invest in harmony with the market’s mood.

Today, when markets are under attack, the most useful, most flexible response for growth investors is a steady retreat into cash. This preserves your capital and sets up your return to buying when conditions improve.

The best thing you can do right now is make a list of attractive stocks for possible purchase. These may be stocks with strong fundamentals or compelling stories. Or they may be showing their strength by resisting the downward pull of the market. Preferably all three! The better you are at identifying these stocks, the greater your head start when the buyers come out to play again.

My candidate for your watch list is First Solar (FSLR), an Arizona-based designer and manufacturer of solar modules that use a proprietary thin film semiconductor technology.

Photovoltaic (PV) energy has been the big hope for the future for as long as I can remember, but something has always cut the industry off at the knees, whether it’s higher cost per unit of electricity, shortages of polysilicon feedstock or a withdrawal of government support during the Great Recession.

First Solar’s big advantage was always that its thin-film technology, while not quite as efficient as conventional modules, lowered its costs and insulated it from polysilicon shortages. But the company has improved its efficiency ratings and has partnered with GE on reducing the cost of the non-PV parts of major installations.

The company has also shifted its emphasis toward large, standalone installations built to feed electricity directly into power grids. First Solar, which experienced reduced revenue and earnings in 2013 and isn’t expected to shoot the lights out in 2014 either, has a big backlog of orders for turnkey power projects and is competing aggressively for plant contracts outside the U.S., which has historically been its best market.

Management has projected an 87% jump in earnings in 2015, and investors have taken note, also noting that China’s pollution problems are likely to lead to a major commitment to PV power in that giant market.

Personally, I think FSLR, which popped higher on huge volume on March 19, is a great watch list stock for spring. It’s a good time for a hopeful, green stock with a big future. FSLR has also been holding those March gains well and is sitting right on its 25-day moving average. It wants to go higher once the market enters a sustained uptrend.

Stock Market Video

In this week’s Stock Market Video, Mike Cintolo talks about the possibility that last Tuesday was a near-term market low. While the intermediate-term trend is still down, Mike believes the wheat will begin to separate from the chaff should the market bounce and as earnings season progresses. He’s not advising too much buying, but he goes over a few growth stocks showing early signs of resilience, as well as a bunch of commodity-related stocks that have popped to new highs. Click below to watch the video.


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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.


Tim’s Comment: Human nature is little changed since Marcus Aurelius was emperor of Rome, and the increasing emphasis on headlines in this digital age means we continue to be told that any one day’s market action was the result of one factor-which is ridiculous. Every day, every investor is weighing a slew of factors-not least their own personal liquidity-and deciding whether to buy, hold or sell. Yet most investors believe the headlines, because most people find it difficult to think independently.

Paul’s Comment: Besides being emperor from 161 to 180, Marcus Aurelius was a stoic, a follower of the philosophy that emphasizes the acceptance of fate, the use of reason and self control. Not bad principles when the bears are in control of the market, and very close to Cabot’s market-timing disciplines. The emperor’s admonition against simplistic explanations for complex phenomena is enormously timely in these unsettled market conditions.

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 4/14/14-Paul Goodwin’s Favorite Stock to Buy Now

In this issue, Tim Lutts interviews me, apparently hoping to find out the secrets behind my success. I can’t say whether he succeeded, but he did manage to drag one favorite stock story out of me. Stock discussed: (SINA).

Cabot Wealth Advisory 4/17/14-Best Canadian Dividend Stock to Buy Now

Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, writes in this issue about the first of her picks among Canadian dividend stocks. Stock discussed: Toronto Dominion Bank (TD).

Have a great weekend,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory

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